Friday, August 12, 2005

WHEN I started out on this new book," David F. Swensen was saying the other day, "I thought I was going to take what we do at Yale and make it accessible to the individual investor." Oh, lucky day! Mr. Swensen, the chief investment officer of the Yale endowment - and to my mind, the best manager of institutional money in the United States - was going to show you and me how to invest the way he does.

To his surprise, however, the book Mr. Swensen eventually wrote, "Unconventional Success: A Fundamental Approach to Personal Investment," published this last Tuesday, turned out to be the opposite of what he intended. Its title notwithstanding, it doesn't show the little guy how to invest like Yale. Instead, it shows why the little guy will never be able to invest the way Yale does.

For all the "democratization" that has taken place in the world of personal investing the deck is still stacked against the individual. That was Mr. Swensen's fundamental discovery. And his willingness to change course and turn "Unconventional Success" into a polemic aimed primarily at mutual fund companies, but also at other Wall Street types who fleece the little guy, is to his everlasting credit...

His new book has given Mr. Swensen a greater appreciation of the enormous advantages he has as an institutional money manager, starting with the obvious fact that he has a staff that spends full-time researching investment possibilities. Thus, he takes it as a given that individuals shouldn't pick stocks themselves. "I see every day how competitive the markets are, and how tough. So the idea that you can do this yourself, that's out the window."

What is it about mutual funds Mr. Swensen finds offensive? Just about everything. He hates the way the loads and all the hidden fees mean that the investor is always behind the eight ball. (When I asked him about hedge fund fees, which are much higher, Mr. Swensen replied: "I don't mind paying a lot for actual performance. Besides, when we negotiate fees, it's sophisticated investor versus fund manager. It's a fair fight.")...

So does Mr. Swensen offer any hope at all? Some. He thinks we'd all be better off sticking with index funds, instead of trying to beat the market. He thinks we should get our index funds from Vanguard, with its rock-bottom fees. (As a not-for-profit company, Vanguard also doesn't have the central conflict of interest.) We should have a diversified portfolio of index funds, for the same reason Yale does. We should be disciplined in our approach, especially in rebalancing our portfolio to stick to our diversification targets. Of course, this invariably means paring back on winners and increasing our investment in laggards.